John Paulson On The Worst Case Scenario For The The U.S. Economy

John Paulson made three important points when he spoke to
Les Echos, a French publication, recently.

1. Financial reform could
hinder the recovery. It is text-heavy (2,000 pages!) and thought to
be very difficult to implement. It was precipitated by an
emotional reaction. The result is that it creates numerous
conflicts and uncertainties. As Alan Greenspan says, I think it
will create market distortions.

2. Inflation is a
risk. Quantitative recovery is not without consequences
and creates the potential for inflation. Currently we have no
inflation because we still have overcapacity. But the risk
exists. It is undeniable that this monetary expansion is
equivalent to running the printing press. It remains to be seen
whether the Fed will reduce the recovery before it becomes
inflationary.

3. U.S. debt levels will
sooner or later reach a "very serious" problematic
threshold. There are serious uncertainties about the
exit strategy of the Fed. I'd be very surprised if there was a
third round of QE. While many economists believe that the U.S.
debt remains at a manageable level, sooner or later it will reach
a threshold that will be a problem. Today, our federal debt is
still at a relatively reasonable (around 65% of GDP), but if we
add the local debt of the States and local governments are
approaching the level of 100% of GDP which begins to be close to
that of Greece or Portugal. It is a very serious potential
problem. The U.S. does not have the ability of unlimited
borrowings.

Note: Paulson also talked his book
a bit (he's betting on a housing recovery and gold
strength):

"The major risk for the U.S. recovery is stagnating housing
market."

"We must look at the currencies in relative terms. The UK is
committed in the same way that the United States in terms of
monetary stimulus. The euro has its own problems. In these times
of uncertainty for paper based currency, I feel more secure in
holding gold. Given the risks of inflation in three to five years
and the volatility of the euro, gold offers good protection
against the paper currencies devaluation and even the possibility
of generating a return on fixed investment.

Also interesting: 40% of Paulson's investors chose to invest in
his
gold-denominated fund. Only 3% of the Paulson fund's assets
are invested in gold.